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RR Donnelley Records Drop in Earnings on Higher Sales

August 3, 2011
CHICAGO—August 3, 2011—R.R. Donnelley & Sons reported second-quarter net earnings attributable to common shareholders of $12.2 million on net sales of $2.6 billion, compared to $88.8 million on net sales of $2.4 billion in the second quarter of 2010.

The second-quarter net earnings attributable to common shareholders included pre-tax charges for restructuring ($51.4 million) and impairment ($24.3 million, non-cash), a loss on debt extinguishment related to the tender offers on the 2015, 2017 and 2019 Notes ($68.6 million),and acquisition-related costs ($0.9 million) totaling $145.2 million, partially offset by a pre-tax gain on an investment of $9.8 million in 2011, compared to charges for restructuring ($9.2 million) and impairment ($1.5 million, non-cash) and acquisition-related costs ($3.3 million) totaling $14.0 million in 2010. Additional details regarding the nature of these charges are included in the attached schedules.

Non-GAAP net earnings attributable to common shareholders totaled $105.6 million in the second quarter of 2011 vs. $99.5 million in the second quarter of 2010. Second-quarter non-GAAP net earnings attributable to common shareholders exclude restructuring and impairment charges and acquisition expenses for both years.

“Our platform, like our customers, felt the economic challenges during the second quarter,” said Thomas J. Quinlan III, RR Donnelley’s president and CEO. “Over the past month or so, customer demand in a variety of our offerings appears to be firming up, so we begin the second half of the year with renewed optimism.”

Quinlan continued, “The share repurchase program and successful bond offering that we launched in the second quarter demonstrate the confidence that management and investors alike have in our ability to continue to drive strong cash flow. We remain on track to deliver approximately $600 million of operating cash flow less capital expenditures for the full year.”

Summary   

Net sales in the quarter were $2.6 billion, up 8.9 percent from the second quarter of 2010, including increased sales related to the acquisition of Bowne. Pro forma for acquisitions, net sales grew by 0.3 percent. Changes in foreign exchange rates accounted for $46.0 million of the increase from the second quarter of 2010. 

Gross margin of 24.5 percent in the second quarter of 2011 was flat to the second quarter of 2010 as productivity efforts, the acquisition of Bowne, lower variable compensation expense and a higher recovery on print-related by-products were offset by lower volume, primarily in books and directories, and pricing pressure.

SG&A expense as a percentage of net sales in the second quarter of 2011 increased to 11.8 percent from 11.1 percent in the second quarter of 2010 primarily due to the acquisition of Bowne and higher pension and other benefits-related expenses.

Operating earnings were negatively impacted by restructuring and impairment charges and acquisition expenses of $76.6 million in the second quarter of 2011 and $14.0 million in the second quarter of 2010, resulting in operating income of $116.1 million in 2011 and $175.3 million in 2010. Operating margin was 4.4 percent in 2011 and 7.3 percent in 2010.

Excluding restructuring and impairment charges and acquisition expenses, non-GAAP operating margin declined to 7.3 percent in the second quarter of 2011 from 7.9 percent in the second quarter of 2010. Changes in foreign exchange rates, primarily due to export sales from certain international operations, and higher pass-through paper sales unfavorably impacted non-GAAP operating margin by approximately 29 basis points. The remainder of the margin decline was primarily due to lower volume, continued pricing pressure and higher unallocated Corporate costs for pension and other benefits-related expenses, which more than offset the impact of productivity initiatives and lower variable compensation expense.

Segments

Net sales for the U.S. Print and Related Services segment in the quarter increased 6.2 percent from the second quarter of 2010 to $1.9 billion primarily due to the acquisition of Bowne and volume increases in commercial, logistics and financial print, partially offset by volume declines in books and directories and continued pricing pressure across the segment. Pro forma for acquisitions, net sales in the U.S. Print and Related Services segment decreased by $50.7 million, or 2.6 percent, primarily due to volume declines in books and directories and continued pricing pressure across the segment.

The segment’s operating income, which was negatively impacted by charges for restructuring and impairment of $65.1 million in the second quarter of 2011 and $3.5 million in the second quarter of 2010, decreased to $132.8 million from $179.5 million in the second quarter of 2010.

Excluding the restructuring and impairment charges, the segment’s non-GAAP operating margin improved to 10.3 percent in the second quarter of 2011 from 10.1 percent in the second quarter of 2010, due to productivity initiatives, lower variable compensation expense and a higher recovery on print-related by-products, which more than offset the impact of volume declines and continued pricing pressure.

Net sales for the International segment in the quarter increased 17.2 percent from the second quarter of 2010 to $702.5 million, including increased sales related to the acquisition of Bowne. Pro forma for acquisitions, net sales grew by $58.5 million, or 9.1 percent as changes in foreign exchange rates and increased volume offset the impact of continued pricing pressure.

The segment’s operating income, which was negatively impacted by charges for restructuring and impairment of $9.8 million in the second quarter of 2011 and $6.5 million in the second quarter of 2010, improved to $43.6 million in the second quarter of 2011 from $42.7 million in the second quarter of 2010.

Excluding the restructuring and impairment charges, the segment’s non-GAAP operating margin declined to 7.6 percent in the second quarter of 2011 from 8.2 percent in the second quarter of 2010 as the 99 basis point impact from changes in foreign exchange rates, primarily due to export sales from certain operations, as well as pricing pressure more than offset the benefits of increased volume and productivity efforts.  

Unallocated Corporate operating expenses increased to $60.3 million in the second quarter of 2011 as compared to $46.9 million in the second quarter of 2010. Excluding restructuring and impairment charges of $0.8 million and acquisition expenses of $0.9 million in the second quarter of 2011 and restructuring and impairment charges of $0.7 million and acquisition expenses of $3.3 million in the second quarter of 2010, unallocated Corporate operating expenses increased $15.7 million to $58.6 million in the second quarter of 2011. Higher pension and other benefits-related expenses and the acquisition of Bowne were the primary factors contributing to the increase.

About RR Donnelley

RR Donnelley (Nasdaq:RRD) is a global provider of integrated communications. Founded more than 146 years ago, the Company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the Company employs a suite of leading Internet-based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing products and services to leading clients in virtually every private and public sector.

For more information, and for RR Donnelley’s Corporate Social Responsibility Report, visit www.rrdonnelley.com.

Source: RRD.
 

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